Time to bring your money in-house
Summary: What could be more mission critical than money? So why do enterprises the world over outsource this vital aspect of their operations to banks?
I see there's an argument raging about where to host email, with a vocal minority vehemently in favor of keeping it in-house. Having carefully examined the arguments, I'm wondering why these people are still outsourcing their banking.
What could be more mission critical to the commercial lifeblood of a business than money? And yet enterprises the world over are entrusting this vital aspect of their operations to money hosting providers — otherwise known as banks — despite a track record of repeated fraud, deception and failure running throughout the history of the banking industry.
Why would anyone want to give up control of such a vital resource to outsiders? The technology to securely and safely store, transport, lend and hedge money is perfectly well understood. Compared to the equivalent bank charges a typical enterprise has to pay out over the course of a year, you can easily show that, with prudent purchasing and the right staff, you'd save money by doing it yourself. Surely it's a no-brainer?
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Talkback
Excellent question!
But I don't have to, and for some time now I have been contemplating a switch to non-traditional banking forms. Why? Because I personally can self-bank cheaper than going to a real bank. How? Paycheck cashing places and money orders from the convenience store. I do not use credit cards (vampires), and I only use a debit card because carrying large sums of money isn't a good plan. But currently, my bank "mugs" me for $40/month in ATM fees (their fees plus the fees at the ATM machine), and I could do paycheck cashing and money orders for about $10/month. A $50 fireproof/waterproof lockbox would contain all of my cash assets nicely (then again, except for my bed, launge chair, and bookshelves, all of my posessions fit into my car). So yeah, I could self bank, should self bank, and I probably will be self banking very soon.
Now, why doesn't a business do this? I really can't answer that question. In many other countries, large companies do self-bank, because they own their own banks, particularly in Japan. Even a number of US companies self-bank. Indeed, most large companies self-insure, because it makes more sense for them to have the money in the proper account than to pay outrageous premiums.
I suspect the problem is in rules and regulations. I cannot tell you why more companies do not self-bank, and I really cannot think of any particular reason why they shouldn't, once a company is large enough to meet the minimum asset requirements, and the fees and what-not to become a member of the banking community become less than the fees paid to a bank.
It's bad enough that Us companies are stupid enough to pay banks to recommend dumb M&A deals, where the banks make millions and both companies end up losing stock price and become weaker. I think a lot of the problem is cultural. CEOs, by and large, are herd animals. "Thinking outside the box" is a "bad thing". Look at Mark Hurd. All he knows how to do is slash budgets so deep that the company is completely crippled, and all it can do is pretend to be able to do business. He is celebrated as some genius or turnaround wizard. All he knows is how to please the stock market. Building a high stock price is considered "success", because the real mission statement is always "increase shareholder value". The problem with that, is "shareholder value" really means "stock price", when it used to mean "the value of the company in real assets". When investors went from truly investing in a company, to investing in what amounts to being baseball cards (I lifted the anology from Mark Cuban's blog, BTW, www.blogmaverick.com, excellent site), that is when CEOs went from building a great business, to building a great image. It also dovetails with the decline of the vertically integrated company that owned everything, to a company model where nothing in done in-house except for the bare minimum. The end result is companies that are less able to weather economic storms. GE will always do well because they have their fingers in so many pies. Microsoft will always do well, because they have their fingers in so many pies. Heck, Google could trounce them in every category that Microsoft directly competes with them in, and it would only be a small portion of Microsoft's business, basically the MSN/Live stuff. That's running a quality business.
My point is, CEOs in the US are afraid of doing anything that shareholders (frequently giant banks) see as a "risk", regardless of whether or not it is truly risky. I bet that many companies that don't self-bank could save millions of dollars a year, but they don't because "that's not our core competancy". Funny, I thought making a profit should be a company's "core competancy"? But "core competancy" is the current b-school fad. I worked for a major pharmeceutical company that sold it's sub-division that made cosmetic/hygeine products, even though it was making billions in profit a year, because it made the company's profit margin lower. That's the dumbest thing I ever heard of in my life. Would you take a pay cut because it put you into a higher tax bracket and you had to buy nicer clothes for the job? I bet not. This is how CEOs think.
Please forgive the wide ranging and probably less than coherant nature of this post. I am extremely tired and have had an emotion charged day that still has not ended, even though it is 3 AM. I hope the general idea comes through though: more businesses could and should self-bank, and unless there is a legitimate business reason not to do so, such as laws and regulations, I think they are foolish for not doing so. I beleive in autarky: do as much by yourself as you possibly can, eliminate reliance upon others, and then the only thing you have to fear failing is yourself.
J.Ja
Exactly
Come on!
You talking about banking or business in general.
I haven't lost any money I've put in banks, but if I had my companies data with an ASP (ie Salesforce) I may well have lost customers and therefore; money.
You're comparing apples and oranges.
Big companies don't bank
Microsoft has $40B in "cash". Does Phil believe that money is kept in a bank?
GM has their own financing division. GMAC loans to dealers and car buyers. Every "0% Financing" deal is possible because a car manufacturer is willing to lose profits from their financing division to assist their manufacturing/sales division.
Many large companies even insure their company vehicles rather than outsource it.
There are only three good reasons to outsource:
- accountability requires an supposedly uninterested party.
- when your company is too small to support the function full-time.
- when it is impossible to get the required expertise in-house.
The first reason is easy to understand. Financial reports for public companies must be certified by an outside party, so companies outsource some of their accounting to meet this legal obligation.
The second reason is more common. Tiny companies do not need a full-time accountant, so they outsource payroll. Medium-size companies do not need enough legal advice to support lawyers of every specialty. Microsoft and IBM need enough of these functions to support their own accounting and legal divisions.
The third has several variations. If you want Madonna to sing at a product release, you hire her for the one event; you cannot make her a full-time employee. If you want the best lawyers for a high-profile legal case, you must outsource to their firms. If you need particular technical expertise, you may need to outsource with a company with that expertise. In each case, the expertise cannot be brought inside the company.
Finances makes it easy. If you want your money to be handled by a particular manager, you buy into their fund. You cannot hire the manager, but you can outsource the function. You do not need a bank to make the decisions; it is better for medium-size companies to have a full-time employee that handles moving the money between funds. The largest companies can skip the funds and have full-time employees invest in stocks (even if they are just copying what an outside manager is doing.)
Email is even easier. Setting up email for any size company just requires hardware, some free software, and someone who understands redundancy and backups. Maintaining the email system requires spare hardware, and someone who can restore from backups. Assuming a small company already has a static IP for their website, the only investment is a pair of $1000 servers and some time from their computer administrators (who could be part-time/outsourced at very small companies.) Why outsource (pay a monthly fee to another company) when it is so inexpensive to do it in-house?
Some suggest outsourcing email to use the expertise of another company, but email is too simple to require special expertise.
Some suggest the other company would be more accountable, but having someone to blame does not offset the loss of productivity if something goes wrong.
Some suggest companies should outsource to focus on their "core business". These people are making money as outsourcers. Anything that affects your bottom line is your business.
Email is a mission-critical system for every business, and every company should keep it in-house.
Another good reason to outsource
- When it's cheaper, faster and better to outsource.
Wouldn't that be a strong reason?
And another:
- When you get more accountability from an outsourcing contract.
Even if you keep your email in-house, you still run it on commercially produced software. So you've already outsourced the product development of that email server. And yet you get no accountability. If the software has bugs, or is difficult to install properly or is slow to get upgraded, you have no recourse against the software vendor. Unless you sign a service level agreement with an outsourced email provider, in which case they not only agree to keep it up and running, but you can also tie them down to rapid bug fixes, leave them to worry making sure the implementation performs to requirements, and have a commitment to regular upgrades.
More reasons?
- When it's cheaper, faster and better to outsource.
- When you get more accountability from an outsourcing contract.
I disagree with both.
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Every outsource company wants you to believe using them will be "cheaper, faster and better" than doing it yourself.
"Cheaper" implies that they can leverage doing a task for many companies to make it less expensive for each one. This may sometimes be true (Google has the expertise to automate everything), but the overhead of another company's existence is added to your cost. You are paying for the other company to support technicians and managers and senior management, and their profits.
I know a company that outsources some programming to India. The original expectation was the new programmers would cost 20% of an American programmer. After a year or two of headaches, slow response times, and hidden costs, they did start saving about 20% of keeping it in-house. They should break even soon. This company is a success stories for outsourcing. Most companies find the loss of control and hidden costs to be unacceptable.
There are downsides to outsourcing even when "cheaper" can be proven. A small company outsources payroll to a service. This is good under my reason #2 because hiring a full-time accountant would be much more expensive than the payroll service. As the company grows, why should they move the function in-house? Why do large companies handle payroll in-house? Because with many employees:
- The information needs constant attention/adjustment not possible with the service.
- Payroll can be integrated with other systems, such as "time-keeping", "project tracking", even "employee reviewal and promotion tracking".
- Fixing problems is the company's responsibility. The employee whose paycheck was for 4 hours rather than 40 hours does not want to hear it will be corrected in next month's paycheck; the employee needs the money now. The company needs the ability to write a payroll check at any time.
Even if the full-time accountant(s) cost more than the service, the company handles payroll in-house because it is a mission-critical function, and they must control it.
"Faster and better" implies the other company has expertise your company does not. If there was one email guru you must have, this could be true under my third reason. If that was the case, the company would outsource the initial setup with the understanding that maintenance would be mostly automated and the rest handled in-house. But email is pretty simple, and there are many people who can configure it properly.
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Phil's second reason is a variation of my first reason in the original post, but without the legal requirement for accountability.
Yeah, we have an SLA. If our email system is down for more than x% of the time, we have someone to blame and expect a discount. Except that 0.00001% downtime happened just as we were landing the big contract, and our in-house people were helpless.
Last year, some of our corporate email accounts were being forwarded (outsourced) to personal Earthlink accounts. It worked great for the first half of the year. Then Earthlink decided to route our corporate email to /dev/null. We have no idea how much business was lost before we realized this was happening and changed the system to use our own servers. Earthlink has not responded to any requests for information.
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Phil also suggests "you still run it on commercially produced software." Few email gurus would suggest "commercially produced software." Sendmail and Postfix are the most common MTAs. I prefer "commercially produced" Domino (behind Sendmail MTAs) for storage and retrieval functions, but there is much good free and open software. The only companies on the upgrade treadmill are using Microsoft Exchange, and "if the software has bugs, or is difficult to install properly or is slow to get upgraded, you have no recourse against the software vendor" still applies; how does using a service improve that? You do have recourse using open source solutions; your company has the option to fix it.
Remember that email is a mission-critical function: you should not be worrying about recourse; you should worry about uptime and recovery scenarios.
In January, Hotmail deleted all the email stored for many (free account) users because they changed the specifications for recording logins. Their old policy was users must login every 30 days. The new policy is visitors must send a memo from Hotmail every 30 days. There was no press release or memo to users; the first anyone knew about it was when they went to Hotmail and received a page about how their account was reserved for them, then opening an empty account. Hotmail has admitted it is impossible to restore the old mail because they have no backups. (I could not discover if they have backups for the non-free accounts.)
How can "you get more accountability from an outsourcing contract"? They want your business, but they will never be more accountable or dedicated than your own employees.
You're kidding?
I work for an oil industry supply company that had $1 billion in revenue last year, and all of our money is in a bank. Furthermore, we have MASSIVE customers ($30+ billion revenue each) that pay us from, can you believe, a bank account.
You have a pretty sweeping opinion here...
"Email is a mission-critical system for *every* business, and *every* company should keep it in-house."
Our email system sucks. We're not a small company. We have over $60,000 in hardware and almost the same in payroll costs to full-time admins and they still don't get email done well. I'd much prefer the same money go to an outside party if they can do it right.
So, maybe you should say "...every company but one should keep it in-house" instead of making your baseless sweeping analyses.
Microsoft's Money and Better Email
http://money.cnn.com/2002/04/12/pf/agenda_trail/
Your company had $1B in revenue. According to last June's balance sheet, MSFT had $11B in long-term investments and $33B in short-term investments, and these numbers are low compared to previous years. At 9% APR, they are making $4B per year just from investments.
Microsoft is not using a bank to store their "cash", but they may use banks for payroll and expenses. Banks have much legal responsibility, and it is probably much easier to use an existing bank than own one. See my first reason for outsourcing.
Those legal ramifications also make Phil's comparison between email and banking less useful. It is difficult to start and run a bank. It is not difficult to start and run an email system.
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Yes, I ended with a false generality. Under my second reason, if your company is too small to support the expense of a static IP address, two servers, and a (part-time) employee to keep them running, then your company should outsource email.
I doubt that applies to any company with $1B annual revenue.
I do not know why your "email sucks." It is probably poor choice of software. It could also be hardware or incompetent admins. In any case, the fault rests with the person who is responsible for choosing the software, hardware, and admins, and continues choosing to keep the existing system.
I tried to size how many accounts $60K of hardware could handle, but there are too many variables. A medium server could cost $6000 new, but you can get a slightly used one for $1200. Dedicated to email, each could handle around 20,000 accounts. If GM (>300,000 employees) were willing to use used equipment, they could easily stay under $60K, including failover servers. Using new equipment might cost $200K. (I was involved with their architecture, and this is not how GM is configured.)
If email is mission-critical for your company (and you would not be complaining if it was not), you may need to start over to cure it. Without replacing the hardware, you could hire someone to choose new software and migrate the data, with the goal to make it more stable and require less maintenance.
PS. Talkback was down on FRI, and my first attempt to post this did not appear attached to this article, so I am uncertain where ZDNet stored it.
Thanks to all!
J.Ja
Banking In House
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